Both stocks have posted a negative return over the last five years, falling 35% and 17% respectively in that time.
The big question now is whetherBHP Billiton and Rio Tinto can post a positive return over the next five years.
Rumours of the death of the commodity supercycle clearly werent exaggerated, as demand for oil, metals and minerals has gone into sharp decline.
Once voracious consumer China has lost its appetite as it makes the uncomfortable transition from itsexport-led growth and infrastructure splurge to a mature consumption model.
The iron ore price fell 47% last year to hit a five-year low, and although it has climbed in recent days on hopes of a fresh Chinese infrastructure blitz, analysts suspect the recovery will be short-lived.
There is a glut of the metal right now, to which BHP Billiton and Rio Tinto have been major contributors by ramping up production to record highs.
With production projected to keep rising, the iron mountain is unlikely to subside. Especially asPresident Xi Jinping desperately triesto end the countrys addiction to excess credit.
Other metals are also suffering, with the copper price ata four-year low. Aluminium, tin, zinc and nickel have all dropped lately.
The strong dollar and looming US base rate hike could put further pressure on emerging markets, furthersqueezing commodity demand.
Prices may get some respite if the Germans finally green light a regenerative blast of QE by ECB president Mario Draghi. But I suspect any QE, if it finally comes, wont be enough to be a serious game-changer. The ECB isnt the Federal Reserve.
Iron In The Soul
BHP Billiton and Rio Tinto are playing a dangerous game, ramping up supply as demand falls, in the hope of keeping the cash flowing and squeezing out smaller, higher-cost competitors.
Signs of share price stabilisationin recent weeks may nevertheless suggest that the worst may be over, for now
BHP Billiton looks more tempting to me, given its size and diversification, juicy 5.32% yield (covered 2.5 times) and undemanding valuation of eight times earnings.
Rio Tinto offers a less startling 4% yield. Its relative strength has surprised me, given its heavy exposure to iron ore, which makes up 90% of its production. I wouldnt invest in the stock with much confidence right now.
The worst may be over for BHP Billiton and Rio Tinto, but I cant claimwith any confidencethat the best is yet to come.
The most tempting reason to invest in these two shocks as their juicy dividends, but there may be safer options out there.
The FTSE 100 is packed with top stockspaying as much as 5% or 6% a year.
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